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Why the AIR NZ FPO share price is flying to record highs today

The Air New Zealand (AIR NZ FPO NZX) (ASX: AIZ) share price has taken off today after the aviator upgraded its full year profit guidance before tax to exceed NZ$525 million, which is above the prior forecast of NZ$475 million to NZ$525 million.

The airline’s strong recent performance has been supported by the robust New Zealand economy, tumbling jet fuel bills, and the growth of inbound tourism to New Zealand especially from Asia.

In fact Air NZ is something of a poster boy for airline investors including the legendary Warren Buffett who has recently changed his tune about the merits of airlines as investments.

Buffett’s value-investing vehicle Berkshire Hathaway has recently taken stakes in four major airlines including American Airlines, SouthWest Airlines and Delta. The shock move reportedly due to Buffett’s belief that employee (union) costs or risks are now more manageable, while fuel bills will likely stay permanently lower thanks to the rise of new U.S. shale oil extraction technologies.

Notably, Air NZ has now posted 14 years of consecutive profitability and 12 years of consecutive dividends, although it (and many others) had to be bailed out by the NZ government in the wake of the 9/11 terror attacks that sent shockwaves through the industry.

Investors then need to be cognisant of the substantial risks around investing in the competitive, commonly state-subsidised, and protectionist airline industry, despite the stellar returns Air NZ and Qantas Airways Limited (ASX: QAN) have delivered investors over the last five years.

As an investor in the aviation industry I would prefer to look at monopoly businesses such as Sydney Airport Holdings Ltd (ASX: SYD) or Auckland International Airport Ltd (ASX: AIA). The airlines and their passengers have no choice but to pay to use the airports and their scale plus strict regulation means it’s impossible for a startup to build a commercial airport down the road.

Although I’m not a buyer of airport shares given their inverse correlation to benchmark debt rates, with the global cash rate cycle heading higher investors will soon require higher yields from the airports to compensate for the substantial risks around equity investing. The airports’ substantial debt piles and high valuations are two other concerns and in my opinion their valuations are likely to fall over the next 36 months.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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